Business columnist

As the big four banks look for new ways to grow income during a period of low credit growth, rising impairment costs and rising capital ratios, Macquarie Group has decided to throw its hat in the retail banking ring.

A news story in BusinessDay outlined that Macquarie would form a joint venture distribution deal with Mark Bouris' Yellow Brick Road Group.

The publication of the story prompted Yellow Brick Road to go into a trading halt ahead of an announcement. It is an interesting move given competition in retail banking is ferocious and the big four banks have the advantage over the rest of the banking sector in that they can access debt more cheaply than those with lower credit ratings.

The big four have a credit rating of AA, while Macquarie Bank has a rating of A from Standard & Poor's, A2 rating from Moody's and an A rating from Fitch.

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In the past couple of weeks, Australia's big four banks have reported either full-year or quarterly earnings, all showing that funding costs remain high, credit growth is slowing and impairment charges are rising.

The banks that performed the best are the ones that kept a lid on expenses. And so it was with the Commonwealth Bank today, which was able to lift profits against an increasingly challenging set of circumstances. CBA reported a 6 per cent profit, putting it on track for another record profit for the year, largely due to its ability to keep expenses under control along with impaired loans.

As the euro zone continues to grapple with some massive problems and the Chinese economy slows, the Australian economy is facing some tough headwinds, which is playing out in the Australian banking system.

It means those expecting a rate cut from the Reserve Bank next month shouldn't factor in the banks passing on the full easing.

What it means is that the era of record profits for the banks will continue but the days of super-profits are over. With the home loan market stalling and bad and doubtful debts starting to rise, profit growth will be increasingly driven by the expense line.

The challenge will be to find new sources of income growth. ANZ has bet on Asia as the road to new growth, NAB has bet on an improvement in business banking, a turnaround in the UK and a lift in its financial services operations, Westpac is hoping its resuscitation of the Bank of Melbourne brand works and Commonwealth Bank has a big exposure to wealth management.

For the regional banks, it will be interesting to see how tough competition, weaker demand in personal banking and rising costs of capital will continue to impact earnings. As for Macquarie, it will be more a question of watch this space.

26 comments

We don't even know what competition is in this country. Bring in the big overseas banks to see some real competition.

Commenter

Brisbane Bear

Location

Brisbane

Date and time

November 07, 2012, 9:36AM

They're already here, and have been for years !HSBC, Bank of China, Bank of America/merrill lynch to name a few.Try do a search for them and you'll find loads !Just goes to show the competitionj isn't that good.

Commenter

Jonathan

Location

Melbourne

Date and time

November 07, 2012, 10:39AM

"A sensitive time for banks" Are you kidding!!!! What happened.....did they fall over a mountain of money & hurt themselves. Being a bank in OZ is a license to print money. I don't often agree with Mr B Bear but on this occasion I do.........bring in the big overseas banks.

Commenter

Bazza

Location

Date and time

November 07, 2012, 11:06AM

What big overseas banks? Australia's big four make up a quarter of the largest banks in the world.

Commenter

Roo

Location

Date and time

November 07, 2012, 1:10PM

This appears a touch disingenuous, Adele. The "pressure" Australian banks face is all on their short-term reported profits. It appears that nothing else matters (aside from keeping the little club free of any real competition.) Tough competition at the retail level? Highly unlikely. Consider St George, Bank West or the credit union movement. They are either niche players, or swallowed whole. This new offering will be no different, I fear.

This is far from savagely fierce competition. It is an oligopoly. NPAT continues to increase, which is hardly a ferocious environment. When NPAT starts to become adversely affected by competition, then you may consider it is on the road to ferocious.

The only ferocious competition is the market dominance of the Big 4 compared to the rest of the market. The big 4 are savaging the rest of the market.

Commenter

Whatthe?

Location

Date and time

November 07, 2012, 10:05AM

No discussion of banking competition is complete without an examination of the wholesale funding guarantee fee under which the Big Four are charged 0.7% annually for the amounts covered, Macquarie and Suncorp 1%, and the rest involved 1.5%, supposedly in the national interest.

The Treasurer still hasn't bothered to explain why, without any of the review activity Mr Rudd promised at the scheme's inception in 2008. he continues to gouge most participating smaller financial institutions 80 additional basis points under this fee (a practice unanimously condemned by the Senate inquiry into banking competition in May 2011), increasing their costs of borrowing 5-20 basis points. This differential remains at the extreme end of Western experience and has made it much easier for the Big Four to appropriate part of each recent Reserve Bank reduction in the cash rate.

Commenter

Albert gerber

Location

Griffith

Date and time

November 07, 2012, 10:13AM

~yawn~Coles & Woolies are the ACCC idea of competition. Good luck with the banks.

Commenter

Mike (mortgage broker)

Location

Sydney

Date and time

November 07, 2012, 10:16AM

They say they can undercut the big 4 by 1%...if that is the case then what is going on with competition? I have worked for banks (3 in Aus) and they are just big adult daycare centres for creating make-work. 95% of banking is in the computer software and licensing.Instead of bailing out the banks with taxpayer funded insurance, ultra-cheap credit and allowing record profits, the government should have let them fail.I know that "moral hazard" is a virtually unknown concept in Australia, but rewarding failure with profits is very stupid. Propping up highly profitable companies with taxpayer funds is not only immoral, but appalling economics. Folks are so busy "investing" in house inflation or profits from credit expansion that real investment in factories, infrastructure and small (self sustaining profits) business.Highly profitable banks are *not* good. We need a stable finance system, not a gaggle of economic vacuum cleaners that guarantee mal-investment.